Restrictions imposed by global financial institutions on smaller regional and local counterparts as part of reducing risks associated with anti-money laundering (AML) and combating financing of terrorism (CFT) are causing significant business losses to regional banks and money transfer companies.

Global financial institutions are increasingly terminating or restricting correspondent banking relationships with remittance companies and smaller local banks in many regions of the world — a practice that is called “de-risking.”

De-risking has been rampant in regions that are generally perceived to be high risk. Bankers say GCC region is perceived as ‘high risk’ because of the volatile political situation prevailing in the neighbouring countries and regions.

“Coordinated action among global banks, regulators and regional institutions are required to save the correspondent banking channels and access of regional institutions to global financial markets,” Samantha Pelosi, senior vice-president, payments and innovation, Bankers Association for Finance and Trade (BAFT) said at the BAFT Mena Fourm last week

De-risking practices by global financial institutions threaten to cut off access to the global financial system for remittance companies and local banks in certain regions including the GCC. Speaking at a panel discussion on ‘De-risking: Cause and effect and future direction’, Faisal Lalani, Head of Institutional & International Banking, Emirates NBD Bank said: “Evolving banking regulations have changed banking business in the region with ever increasing cost of compliance while threatening a number of correspondent banking relations.”

An on-the- spot survey of senior banking professionals from the region attending the BAFT Mena Bank to Bank Forum showed that 59 per cent believed that de-risking has not reduced the risks associated with AML and CFT while the cost of compliance in correspondent banking business has gone up significantly in the last few years.

Recent World Bank surveys have found de-risking is adversely impacting correspondent banking relations of remittances companies and smaller banks. Both surveys found that de-risking is indeed happening in pockets around the world — but its effects are unevenly distributed, with some regions more affected than others.

If the current trend continues, people and organisations in the more volatile areas of the world or in small countries with limited financial markets could be completely cut off from access to regulated financial services. The World Bank has observed that de-risking may threaten progress that has been achieved on financial inclusion. It also has the potential to reverse some of the progress made in reducing remittance prices and fees, if banks close or restrict access for money transfer operators.

Averse to the rising costs and resources required to assess and mitigate the risk associated with international exposure and business relationships, some financial institutions are restricting business relationships with entire countries or classes of customer.

“Correspondent banking — which facilitates the cross-border movement of funds and provides financial institutions access to financial services in different currencies and foreign jurisdictions, supporting international trade, commerce and economic development — has been a particular target,” Katerina Pagoni, Associate Director at KPMG, wrote in KPMG’ UAE Banking Perspectives.

Experts say de-risking can frustrate AML/CFT objectives and may not be an effective way to fight financial crime and terrorism financing. By pushing higher risk transactions out of the regulated system into more opaque, informal channels, they become harder to monitor.

“The support of banking system is very an important for regulated money transfer business as all transactions are executed through the banking channels. Compliance is important for all stakeholders and inclusion is very important to achieve this,” said Santhosh KJ, chief compliance officer, UAE Exchange Group.

Global regulators such as the UK’s Financial Conduct Authority (FCA) and the US Department of the Treasury are concerned that a decline in correspondent banking may drive payment flows underground, posing a threat to the stability and integrity of the financial system.

Analysts say financial integrity and financial inclusion are complementary. Financial inclusion is a necessary precondition to effectively mitigate risks and combat financial crimes.

“Financial institutions, here in the UAE and in global banking centers, must ensure they have effective governance in place to adequately assess risks and consider any adverse impact that the termination of correspondent banking relationships may have on customers and countries,” said Pagoni

source : gulfnews